Steady as She Goes

03/29/2007 12:00 am EST


Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Dan Wiener, editor of The Independent Adviser for Vanguard Investors, says there are a lot of things going in the market’s favor, and despite recent setbacks stocks are still doing pretty well.

The Fed held steady for the sixth time last Wednesday (not unexpected), but the bigger news is that they removed some language that had previously indicated they were leaning toward tightening. The stock market loved that, and away it went—at least for a few days.

However, I think it’s interesting that Wall Street interpreted the Fed to mean they are less worried about inflation and, hence, might consider cutting rates down the road, rather than the alternative explanation, which is that they are worried about the slowing in the economy and, yes, might cut rates down the road.

Last Tuesday’s earnings announcement by Oracle was good for the software company, for sure, but more importantly, it may be an early indicator that tech spending is on the rise, which means businesses may be picking up some of the consumer spending slack that economists worry is due to the housing slowdown.

Speaking of which, while the housing starts numbers for February were well above what was expected, there continues to be a lot of confusion about just whether or not the housing industry has bottomed (and some data released this week dampened the bullishness—Editor), and whether the sub-prime loan debacle, which is just starting to show a big increase in loan defaults, is but the tip of the iceberg.

I’ll tell you this: The sub-prime debacle isn’t hurting and may ultimately help those of us with investments in GNMAs, as more borrowers will once again go the GNMA route, giving the fund’s managers more “product” to work with in earning us strong, low-risk returns in this low-yield environment.

Acquisition binging hasn’t ended yet. It doesn’t really matter what the industry is (banks, utilities, health care service providers, oil riggers, retailers), so long as private equity funds have cash at their disposal, and there’s a lot of cash currently at their disposal. Let them take companies private; it not only bids up prices of other, comparable companies but also reduces supply of public companies, which can’t be bad in a world where demand remains strong.

Let’s run through the numbers:

Other than the Dow Jones Industrial Average, which is down less than one percent since the beginning of the year but is still “in the red” (so to speak), all other major US market indices are in the black for 2007, with mid-cap stocks the strongest. The Standard & Poor’s 400 MidCap index is up 5.4% so far this year, while the S&P 600 SmallCap is up 2.7%. By contrast, the S&P 500 index of large stocks is about even.

In the bond market, the yield curve has curved a bit more, with long rates rising and short rates falling, though the big dip in the middle means the curve looks more like a smile than anything else. So, there’s little advantage to investors extending maturities when you can earn 4.9% on a three-month T-bill.

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